The European currency took a hit on Tuesday when Standard & Poor's downgraded Ireland to AA- and warned the outlook was still negative, fanning worries about euro zone sovereign debt and the banking system.

A resulting wave of short-covering lifted the euro from a low of $1.2587 to as high as $1.2718 at one stage, before news of the Ireland downgrade dragged it back to $1.2635.

The single currency may gain further as it approached two technical levels that indicate it may rise against the U.S dollar. The shared currency was near the 50 percent Fibonacci retracement of its advance from a more-than four-year low of $1.1877 on June 7 to a three-month high of $1.3334 on Aug. 6. It could rise to $1.29 in the next few days.